Trade and the Honest Candidate

By Sebastian Mallaby

The Washington Post

Monday, August 2, 2004; Page A17

John Kerry may have surrounded himself with Clinton veterans, the technocrats
who form the Democratic Party's permanent establishment. But the tone of his
convention speech -- nationalistic not just on matters of defense but also on
trade and economics -- marked a departure from the Clinton orthodoxy. Kerry
attacked the outsourcing of jobs, which he implicitly blamed for a decline in
manufacturing and in middle-class living standards. What does it mean, the
candidate asked, "when Dave McCune, a steel worker I met in Canton, Ohio, saw
his job sent overseas and the equipment in his factory literally unbolted,
crated up and shipped thousands of miles away, along with that job?"

Since Kerry asks this question, perhaps he will be good enough to provide voters
with the answer next time he raises the subject.

As Kerry and his
advisers know, trade explains only part of the decline in manufacturing.
Between 1970 and 2002, the sector's share of U.S. gross domestic product fell
from 24 percent to 14 percent, a drop of 10 percentage points. But the trade
deficit in manufactured goods grew by only about 4 percent of GDP over this
period. Even though it's true that the deficit has recently grown sharply,
deeper historical forces explain manufacturing's attrition.

What forces?
An honest candidate might highlight two. First, Americans are growing richer,
and richer people tend to spend less of their money on manufactured goods and
more on services. As a result, the composition of production tends to shift.
Second, manufacturing productivity has risen fast -- considerably faster, in
fact, than the average rate for the economy. That productivity gain explains
why manufacturing jobs tend to pay well. But it also allows firms to meet
consumers' limited demand with fewer workers, so that manufacturing employment
has fallen even faster than manufacturing's share of GDP.

So here's
what Kerry ought to say. "My fellow Americans, I promised in my convention
speech to revitalize manufacturing. But this sector's long-term decline is the
flip side of our economic progress. Our manufacturing workers are marvelously
productive, which is why they are paid well and also why they aren't more
numerous."

While he's at it, Kerry could correct the impression that the
pain an Ohio steel worker feels is about to beset millions of others. American
voters are forever being told that workers in poor countries get paid
rock-bottom wages and that there's something suspiciously unfair about this;
"our plan calls for a fair playing field" was Kerry's summation of his trade
philosophy at the convention. But the fear of foreign workers is
exaggerated.

The reasons are explained in "Why Globalization Works," a
powerful book by Martin Wolf, the chief economics commentator at the Financial
Times. Foreign workers may be cheap: Chinese ones, for example, cost an
average of $730 a year in the second half of the 1990s, as against $29,000 for
the average American. But the average Chinese worker in this period added only
$2,900 of value per year, while Americans added $81,000 each. U.S. workers are
better educated, better managed and equipped with better machinery: They had at
their disposal fixed capital worth 25 times as much as the machines their
Chinese rivals used. No doubt, in the future, China's handicaps will erode.
But China's wages will rise, too, offsetting the advantage.

This is not
to deny that trade has a cost. It does destroy some jobs, and it forms a small
part of the reason why unskilled workers (those who compete most directly with
cheap foreign ones) have seen wages stagnate or decline over the past quarter of
a century. But dwelling on these costs is the equivalent of denouncing new
technology, which accounts for a much bigger part of the travails of unskilled
workers. "What if we have a president who believes in science?" Kerry asked
the nation last Thursday. What if we had a president who acknowledges trade's
huge advantages?

Over the past generation, trade has lifted millions of
people in developing countries out of poverty. It has generated new wealth at
home, making all kinds of products more accessible to working families. Kerry,
who complains about the rising cost of college tuition and health care, should
acknowledge that inflation in these sectors reflects the fact that they aren't
traded. The right response to trade's real downside is to spend part of the
dividend compensating society's least fortunate -- for instance, by making the
tax code more progressive and spending the proceeds on Head Start, inner-city
schools and other programs that help trade's potential losers.

Kerry's
views on these matters suddenly count more because the world trade talks
launched three years ago achieved a breakthrough over the weekend. It seems
altogether possible that the next president will have the job of completing
these talks and pushing the results through a skeptical Congress. At stake will
be a chance to boost the incomes of the world's people by well over $100 billion
a year. It would be unfortunate to have an American president who is ambivalent
about this opportunity.